Case of Blades, Inc. Evaluation of international trade finance in Thailand Recently, Blades, Inc. decided to establish a subsidiary in Thailand to manufacture Speedos, the company's main product. This decision was motivated by the high growth potential of the Thai skate market. Furthermore, Blades has decided to establish a subsidiary, rather than acquire a Thai skate manufacturer for sale, in order to maintain its flexibility and control over operations in Thailand. Therefore, Blades decided to issue yen-denominated notes to partially finance the cost of establishing the subsidiary. In addition, he arranged to do so instead of in bahts to avoid the high interest rates associated with notes denominated in this currency. 

Blades currently plans to sell all skates made in Thailand to retailers based in Thailand. It also plans to purchase all Thai-made skate components from Thai suppliers. Similarly, all skates manufactured in the United States will be sold to US retailers and all components necessary for US production of Blades will be purchased from US suppliers. Consequently, Blades will not carry out exports or imports once the plant in Thailand begins operations, which is expected to happen early next year. Construction of the plant in Thailand has already begun and Blades is in the process of purchasing the machinery needed to manufacture the Speedos. In addition to these activities, Ben Holt, CFO, has studied suppliers of the necessary rubber and plastic components in Thailand and has identified Thai customers, including several sporting goods retailers operating in this country. Although Holt has been able to locate interested suppliers and customers, he has discovered that he did not take certain precautions to operate a subsidiary in Thailand. First, although the company is relatively well-known in the United States, it is not well-known in the rest of the world. 

Consequently, Thai suppliers are not familiar with the company and do not know its reputation. Likewise, Blades' previous activities in Thailand were restricted to exporting a fixed annual quantity of Speedos to one customer, a Thai retailer called Entertainment Products. Holt has little information about the potential Thai customers who would buy the skates made in the new plant. However, he is aware that although letters of credit (L/C) and bills are usually used for export purposes, these instruments are also used for trade within a country between relatively unknown parties. Among the various potential customers Blades has identified in Thailand, four sporting goods retailers appear to be particularly interested.As Blades is not familiar with these companies and their reputations, she would like to receive her payments as soon as possible. 

The company wants its customers to prepay for their purchases, since in this way the risk of non-compliance will be almost completely eliminated. International Finance Case Blades, Inc. Unfortunately, none of the four potential clients accept a prepaid contract. In fact, one of them, Cool Runnings, Inc., insists on trading on an open account basis. Payment terms in Thailand for purchases of this type are generally "net 60", which indicates that payment for the skates would be due approximately two months after the transaction was completed. Two of the three remaining retailers, Sports Equipment, Inc. and Major Leagues, Inc., have indicated that they would also prefer the open account method, but both would have their banks act as intermediaries for a term bill of exchange. The fourth retailer, Sports Gear, Inc., is indifferent about the payment system, but does not accept the prepayment agreement. Blades also needs an appropriate arrangement with its various potential Thai suppliers of rubber and plastic components. Because Blades' financing of the Thai subsidiary included a US bank, it has virtually no contacts in the Thai banking system. As the company is relatively unknown in Thailand, Thai suppliers have indicated that they would prefer prepayment, or at least a guarantee from a Thai bank that Blades will make payments within 30 days of purchase. 

Blades has no accounts receivable in the United States resulting from its U.S. sales.He has virtually no contacts in the Thai banking system. As the company is relatively unknown in Thailand, Thai suppliers have indicated that they would prefer prepayment, or at least a guarantee from a Thai bank that Blades will make payments within 30 days of purchase. Blades has no accounts receivable in the United States resulting from its U.S. sales.He has virtually no contacts in the Thai banking system. As the company is relatively unknown in Thailand, Thai suppliers have indicated that they would prefer prepayment, or at least a guarantee from a Thai bank that Blades will make payments within 30 days of purchase. Blades has no accounts receivable in the United States resulting from its U.S. sales.

 

Holt would like to please his Thai customers and suppliers, in order to establish strong business relationships with them. However, he worries that the company could be at a disadvantage if it accepts all the demands of Thai customers.

Consequently, he has asked you, the financial analyst, to advise him by answering the following questions:

2. Assuming that banks in Thailand issued a term bill of exchange on behalf of Sports Equipment, Inc. and Major Leagues, Inc., would Blades receive payment for his skates before delivering them? Do banks issuing term bills of exchange guarantee payment on behalf of Thai retailers in case of default?
4. What payment method should Blades suggest to Sports Gear, Inc.? Support your answer.
6. What entity could Blades contact to ensure its sales to foreign retailers? What types of insurance does this entity provide?
8. How could Blades use accounts receivable financing or factoring, considering that it has no accounts receivable in Thailand? If Blades uses a Thai bank to obtain financing, how do you think the fact that Blades has no accounts receivable in Thailand would affect the terms of the financing?
10. Assume that Blades does not have the ability to locate a Thai bank that is willing to issue an L/C in its favor, can you think of a way that Blades could use its US bank to effectively obtain an L/C? from a thai bank?
12. What organizations can Blades contact to obtain working capital financing? If Blades does not have the ability to obtain working capital financing from these entities, what are its other options for financing the working capital it needs in Thailand?